Take Control of Your Money
Our early retirement life, which included a Round the World trip along with a one-year journey across North America in our vintage Airstream, never would’ve happened if we didn’t take control of our money.
I went $50,000 in debt one year out of college, and by following the steps below, I was able to pay it off in two years and begin an adventurous life.
Here are the six steps to take control of your money:
- Complete a current assessment
- Track your spending
- Create a spending plan
- Monitor plan and adjust as necessary
- Save some money
- Attack your debt
1. Complete a current assessment
Can you tell me your current net worth? To get started in paying off your debt, you need to know where you stand.
To do this, complete a current assessment, which is nothing more than a balance sheet to see where you stand with your assets and liabilities.
Start by gathering all financial documents relating to debt (mortgage statements, credit cards, student loans, personal loans, etc.), which will include the amount owed, interest rates, and minimum payments.
Take a look at the balance sheet example below and begin filling it in with your information.
- Fill out the assets section. List out the money in bank accounts, stock accounts, and retirement accounts
- Fill out the liabilities section of your current assessment with all debts, including short term and long term (mortgage)
Add the assets and subtract the liabilities; this is your net worth!
2. Track your spending
Can you tell me how much you spent on groceries last week? How much did you spend on going out to eat or little luxuries like Starbucks?
If you’re anything like me, you’ll be surprised to see where the dollars are going.
After I did this step, I had a good idea of what was happening with my money, and it wasn’t pretty.
In fact, when I looked back, I was making $45,000 a year, or $2,561 per month.
However, I was spending $2,588 per month, which meant I was in the hole by $27 every month… but actually, it was much larger than that when accounting for all of the taxes, insurance, etc. taken out of my check!
I was obviously financing a lot of my living with debt.
There are a few ways to track your spending:
- Old School: write down every expense on a notebook. You can then add these up manually or into a spreadsheet. Keep each item under a general “category” and try to limit to 6-8 categories total.
- Automate: use a site like mint.com or You Need a Budget (YNAB), which links all of your credit cards and will create a nice history for you
Most credit card websites will also have information categorized, but it’s a little harder as you can’t get them all in one place.
Here’s an example tracker; you can print it off or use it in Excel/Google Sheets.
If you’re serious about getting your financial act together, don’t skip this step. Most people will think they have a good handle on their spending, but after this step, they’ll usually learn the real truth!
3. Create a spending plan (Budget)
You have to control where your money is spent, and this happens through a budget, and not one of those “I’ll do it in my head” budgets either.
The key is to keep it simple and not try to have a 100 line-item budget, that’s doomed to fail.
Take your biggest categories of spending that can fluctuate (clothes, groceries, going out to eat, etc.) and create a goal for the amount you want to spend each month.
Use your previous month’s totals from step 2 as a guide to set your total monthly amounts. Here’s an example of a budget:
If you’re really serious about managing your spending, here’s a pro tip: use a cash budget.
This is the most effective way to stick to your spending plan because there’s nothing that makes your spending more real than pulling out a $100 bill every time you go to Walmart or go out to eat.
You’ll experience the psychological impact as you see Benjamin leaving your pocket and paying for Chili’s two for two with too many margaritas, and it will start to change how you spend your money.
When we used our cash budget, we pulled out $1,200 in cash each month, stuffed four envelopes, and then spent from them.
If you weren’t watching your spending closely before, I can almost guarantee by doing this, you’ll quickly find an extra 20% of your dollars back in your wallet. These were our envelopes:
- Entertainment ($400)
- Food/Groceries ($600)
- Clothes ($100)
- Pet spending ($100)
As you can see, it doesn’t include all of our expenses because some are too inconvenient (who wants to pay for gas with cash), and others are more fixed (utilities).
We haven’t used the cash budget in a while, but it’s the best way to get control of your spending. I know it’s a pain, but that’s why it’s so valuable!
4. Monitor plan and adjust as necessary
Now that you’ve created your spending plan, you need to track against it as the month goes on.
As I mentioned in step #3, you may be surprised about how much you are spending on certain areas, so see what happens now that you’re tracking it.
Feel free to move your numbers up or down in certain areas as the months progress. Use the same tracking methods mentioned in step 2.
Now, for one of the most important parts… don’t give up! If you do, you’ll be in the same position that you were in before.
Use the knowledge you have gained from analyzing your spending and spending plan and keep the momentum going.
This needs to change the way you live, not a temporary “diet” in your spending.
5. Save some money
At this point, you should have a good idea of where your money is going and how much you have to save.
You’ll inevitably have some crazy thing happen right as you start making progress, so you’ll want to build up an emergency fund quickly, so you don’t have to use your credit cards.
Let’s see… some of my fun ones over the years have included a towed car, minor wreck, sick dog, ruptured Achilles tendon, and lots of fun house repairs.
Let’s start with two main savings tips:
A. Create an emergency fund
The minimum amount you need to save is $1,000 to cover an unexpected expense, like the ones I mentioned above.
Once you’ve saved this amount, it’s time to move on to the big savings fund.
You need to build up your emergency fund to 3-6 months of expenses so you can cover major issues like the loss of a job or a major injury.
You should keep this money in liquid assets like savings accounts where you can quickly access the money.
Since you know your budget from step three, you should know the amount you need to save.
There are two main obstacles for most people on this step.
The first is you’d rather pay off debt. I agree that’s important, so you can always do both simultaneously, but I’d try for at least three months of spending saved before you go full-on debt repayment.
The other obstacle is for nerds like me who’d rather invest it. This money is your security blanket or your “tell your boss off” fund. Keep it in a place where a major market correction won’t hurt it…. because your boss could become unbearable at any minute!
B. Pay yourself first
Another important part of building your savings is to pay yourself first.
It’s tempting to “save what you have at the end of the month,” but more times than not, you’ll find not a lot of money at the end of the month.
If, instead, you put money into savings before the month starts, you’ll be amazed at how you get by without it.
Set up an automatic withdrawal through your bank and time the withdrawal, so it happens a few days after you get your paycheck.
Just like you’re hopefully doing with your retirement accounts, the money will get pulled before you even had your spendy little hands on it.
6. Attack your debt
Debt is one of our biggest obstacles to freedom, and there’s a lot of people who profit off you being in debt.
It’s time to cut that and kill all of your debt, so you’re working for you and not for GM auto financing.
I hate debt – especially short-term debt. The only debt I plan to ever have in my life is mortgage debt, but I’d like even to get that knocked out soon.
My distaste for debt came from back when I graduated college, and within a year of working, I was already $50k in debt and had a stupid car loan, which I’ve since vowed never to have again.
Now that you’ve followed the previous five steps, you know where your money is going, how much you have to spend, you’ve saved up some emergency funds, and now it’s time to kill the debt.
Many plans give you the steps to pay off your debts, but my favorite is Dave Ramsey’s Total Money Makeover, and it’s the plan I used to pay off my debt.
He has a method called the “debt snowball” where you list all of your debts from smallest to largest on a piece of paper.
You can even write this on a poster board you attach to your refrigerator, so you know every day what you’re fighting.
Start with the smallest debt on the top of the list and pay only your minimums on the other debts.
Attack that smallest debt with the rest of your money until it’s paid off. Mark it off the list and do a happy dance.
Now, it’s time to attack debt number two – this time using the extra money you were paying off the first debt with — thus, creating the snowball!
This really does work, and there’s a lot of psychological benefits for doing it this way versus going after the highest interest accounts first.
Follow these steps to take control of your life so that you can call the shots.
You need to have complete control of your money, and you need to be on the same page with your spouse if you’re married.
If both of you aren’t bought in on this plan, there’s a high likelihood that it won’t work.
